Fitch Ratings has affirmed DFCC Bank PLC’s National Long-Term rating at ‘A+(lka)’. The Outlook is Stable. At the same time, Fitch has affirmed the bank’s Sri Lankan rupee senior unsecured debt at ‘A+(lka)’.
The ratings on DFCC’s Basel II- and Basel III-compliant Sri Lankan rupee subordinated debt have been affirmed at ‘A-(lka)’.
DFCC’s National Long-Term Rating is driven by its intrinsic financial strength. It reflects DFCC’s modest franchise among domestic commercial banks and thinning capital buffers relative to similarly rated peers.
The operating environment in Sri Lanka continues to be challenging. Sri Lanka’s real GDP contracted by 3.6% in 2020 as key economic sectors were severely disrupted by the coronavirus pandemic and the lockdowns to control the spread. “We expect economic growth to rebound by 3.8% in 2021 and 3.9% in 2022 but this will depend largely on the containment of new Covid-19 cases in the country. The outlook on the operating environment assessment is maintained at negative to reflect the potential for further risks stemming from the sovereign credit profile or pressure on domestic operating conditions beyond our expectations independent of changes in the sovereign rating.
Sustained fast loan growth of 4.2% in 1Q21 and 11.2% in 2020 relative to the private-sector peer bank average of 2.1% and 5.7%, respectively, could continue to weigh on DFCC’s common equity Tier 1 (CET1) ratio in the medium term, in the absence of an equity infusion and sufficient internal capital generation to replenish its capital buffers.
“We expect the bank to bolster its capitalisation, although raising capital could be more difficult in the prevailing operating conditions. The bank’s tangible common equity/tangible asset ratio of 11.1% at end-1Q21 was higher than the peer average of 9.6%, reflecting the realizable gain on its stake in Commercial Bank of Ceylon PLC (CB, AA-(lka)/Stable), which is not factored into the CET1 ratio.
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